Debt- The Biggest Setback That Holds People Back From Launching Their Dream Business
When asked what is stopping them from pursuing the career of their dreams, there is one answer that I get over and over. Money.
“I’d love to leave this job that is sucking my soul dry, but I have bills to pay. I just can’t swing it right now.
The truth is, we (Americans) live in the richest country in the world. We have everything we could ever need and more right at our fingertips. In fact, we have so much of the more that we have become completely desensitized to how needless and unnecessary the vast majority of it really is.
One example of nonsensical consumerism? We have drive-thru stations where people who are drowning in debt happily pay half the federal minimum wage for someone else to foam a coffee for them.
These people sit in shiny new cars, whose average payment is $500 per month and depreciates faster than the sofa your cat peed all over, and spend the monthly equivalent of many people’s yearly wages on take-out lunch every month.
According to this NerdWallet article, the average American in 2016 had more than $16,000 in credit card debt and more than $28,000 in auto loans.
Guys, this is nuts. When did we get to a point where this became normal?
Debt is the ultimate slave driver. It holds you hostage, forces you to stay in employment you hate, squanders your quality of life in exchange for a burnt latte, and then makes you think that your way of life is normal.
If you want to pursue the career of your dreams, you must commit to getting out of debt. Hoping for freedom without breaking the shackles of slavery is both insane and fruitless.
Now don’t get me wrong- I’ve been in debt before too. I know where you’re coming from. But in struggling my way out of unfulfilling jobs into the career I love, I have come to realize just how impossible it is to find freedom while living a life of debt and exorbitant spending.
The next two steps are critical to freeing yourself from debt and achieving financial independence.
The first step is to massively reduce your spending. The second step is to begin saving 30% or more of your income every month.
Does this advice sound a little unconventional? That’s because it is.
Step 1. Massively Reduce Your Spending
Conventional financial advice today frequently recommends increasing your income as opposed to reducing your monthly spending.
“The American life is just so expensive right now. It’s nearly impossible to get ahead in today’s economy.”
I disagree. We live in the richest country in the world with more opportunity out there than we could possibly hope to take advantage of. It isn’t hard to get by in our easy first world lives.
What IS difficult is trying to constantly keep up with Joneses by buying way more house than you can afford, financing multiple depreciating vehicles, and jamming your credit card full of table service meals, salon appointments, purses and clothes.
The fact that we no longer look at these things as something that is out of this world crazy is why so many Americans are struggling paycheck-to-paycheck on $60k salaries.
Here are a few tips for getting your spending under control.
Lose the car payment.
There is nothing so financially depraved as financing a $20k+ depreciating vehicle so that you can look good and have a cushy commute. If you invested the same amount of money each month that you spend on your car payment, you could easily retire with millions. Let me lay this out for you.
- Monthly payment is 500.00
- You begin investing at 25 years old.
- We assume a modest 7% return.
By the time you reached 65 years old, you would have 1.28 MILLION dollars in the bank. That means that assuming a standard 4% per year withdrawal amount, you could withdraw $51,266 per year without ever touching the principal 1.28 million. That is just the interest.
And assuming you pay off your home over the course of your working years, $51,000 per year should leave you with a pretty decent amount of monthly income to retire on.
Stop paying for table service.
Here’s another one that really grinds my gears. Thanks to decades of advertising and a culture of constantly needing more, we have massively normalized the idea of having our meals prepared and served to us on a regular basis.
In old times, only the wealthiest people had a team of workers cut, cook, serve, and then clean up after their daily meals. Now we treat this sort of luxury as if it’s perfectly normal to partake in on a daily basis.
Here’s the thing. If you are in debt, you cannot afford to hire someone else to foam your latte for you. You can’t afford table service at dinner. Freedom always comes at a price, and in these circumstances you will have to decide between a life of career happiness and financial independence, or the desire for instant gratification.
Reel in your materialistic tendencies.
This goes hand in hand with the normalization of table service. Our society is obsessed with status and material goods. Hair salons, pedicures, mani services, waxing services, clothing, purses, and shoes… The list goes on and on. This kind of stuff will bankrupt you if allowed to get out of control. And yes, there are people out there who actually file bankruptcy due to years of this type of luxury spending.
The amazing thing for you and I is that these beauty regimens can be done just as well at home for a tiny fraction of the cost.
Yes, I know we all like to look good. I’m not suggesting you stop wearing makeup and try to rock the hobo look in order to save a buck. But I am suggesting that you can wax, paint your nails, and blow out your hair in your own bathroom for next to nothing.
Beauty services are generally purchased as a way to relax and to feel good. But please understand, getting yourself out of debt and into some serious savings will relax you far more than a quick pedi. Not only that, but you won’t have to keep trying to fool the world regarding your status and wealth when you actually have wealth.
Let’s take another look at what that car and those beauty services are REALLY costing you.
Let’s assume that in your previous debt-ridden life you spent $200 per month on beauty and department store purchases. As per the example above, you’ve already sold your $500/month vehicle and are ready to start investing. You now have $700 per month to invest.
We’ll again assume that you start at age 25, with a 7% average return. At age 65, you now have $1,794,320. That's some serious cash!
As you begin taking a 4% withdrawal, you find yourself with a hefty annual income of $71,772. And again, you haven’t even touched your principal, so you could effectively live on this income forever. If you’ve ever dreamed of retiring early, this is precisely how you do it.
STEP 2: Increasing Your Savings Rate To 30% Or More
Now that you’ve ditched your old ways and have your spending on track, let’s talk about savings. Most financial advice today will give you props for a 10-15% monthly savings rate. After all, that’s more than the vast majority of Americans save with the average savings rate for 2016 being a measly 5.7%.
Once you’ve drastically reduced your spending each month, you’ll find that you are able to save much more. Depending on your income, you should be able to save between 30% and 70% of your take home pay.
If you’re reading this post and thinking that would be totally impossible for your situation, take another hard look at your spending. If your income is incredibly low, you may need to find another job or a better job. Generally though, a couple making $50k per year should be able to save 40% of that once they have their spending under control.
How to Never Have to Work Again (Yes, Really)
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The first step is to use every bit of those monthly savings to pay off your debt. Just get rid of it! Quitting your crummy job and living the freedom lifestyle absolutely depends on this one crucial step. So get crazy, do whatever you have to do to cut your expenses down to nothing and knock out your debt fast.
Once your debt is gone, put your monthly savings into an emergency fund. I personally prefer to have a 6 month emergency fund, but you may find that 3 months is sufficient for you. Whichever it is, just save up enough cash in the bank to cover a few months worth of expenses in case life happens.
With no debt and a healthy savings account, you are in a great position to start a new career. Whether that means leaving your old job or starting on the side, you're all set!